Let me ask you a question.
Are you surprised? Banks are learning from their public beating that they took from congress after knowingly lending money to people who want to purchase a home but would have difficulty paying the loan back. Now, after being raked over the coals why are we surprised when those same banks are struggling to lend money to companies and people who look like they will have difficulty paying back the loan i.e. auto companies? Is it because congress is challenged when is comes to learning? Or is it because congress is two faced?
The solution to our problem is not another credit bubble but they are trying, they are trying.
From the banana republic formerly known as the U.S.A.
Daniel Plainview
Thursday, April 23, 2009
Wednesday, April 22, 2009
TALF Killer?
Can you say the Devil? At least acting like Beelzbud. I mean giving someone a means at life but not telling them the cost of their survival until after they are saved. It is interesting using fear to motivate a less than fully thought out response to a problem? Hmm. Sounds like Bush.
I was talking to a person at one of those auto companies and they were basically asked to sign blank agreement allowing the government to change or impose any restrictions regarding compensation the administration or the treasury wanted without any fear of being sued? Isn't like, rule number one in business "don't sign any blank forms?" or at least don't sign anything you do not fully understand? WTF!
Welcome to the backwards "USAR" the banana republic, did I miss the coup d'état?
Here is the Washington Post story.
Have a nice day.
Daniel Plainview
I was talking to a person at one of those auto companies and they were basically asked to sign blank agreement allowing the government to change or impose any restrictions regarding compensation the administration or the treasury wanted without any fear of being sued? Isn't like, rule number one in business "don't sign any blank forms?" or at least don't sign anything you do not fully understand? WTF!
Welcome to the backwards "USAR" the banana republic, did I miss the coup d'état?
Here is the Washington Post story.
Have a nice day.
Daniel Plainview
Monday, April 20, 2009
Are you Wealthy?
Why are the people who work 7 days a week to support their family in the sights of the Democrats? What was rich is no longer rich, but they can hope for deflation.
Wealth-Less Effect: Earning Well, Feeling Otherwise
Sponsored by by Gary Fields
Monday, April 20, 2009
provided by
Proposed Tax Increases on Six-Figure Earners Highlight Mounting Costs of Living -- and the Relativity of Prosperity
Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.
More from WSJ.com:
• How Much Can a Garden Save You?
• Ditch the Jet. Flying Commercial Is Cool
• Tax the Super-Rich More Than the Rich?
Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.
"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."
It is a tricky situation in which some Americans find themselves after a long boom: They are by no means struggling, compared with the 98% of Americans who make far less, but depending on where they live and the lifestyle choices they have made, they don't necessarily feel rich, either. Worse, in their view, they are facing the same tax rates as those making millions. Some of the expenses are self-inflicted -- like private-school costs and conspicuous consumption. Others, though, are unavoidable, like child-care costs, larger health-care deductibles and education expenses, especially college.
Under Mr. Obama's budget proposal, two of the highest tax brackets would see rates rise, and deductions would be reduced for households earning more than $250,000 annually. President Obama said Wednesday, "We've made a clear promise that families that earn less than $250,000 will not see their taxes increase by a single dime."
By any statistical measure, that income level is at the top of the bracket. But for those closest to the line, the money might be less a sign of affluence than it is of the industry of dual-income couples. It is possible, say observers, that veteran civil servants could fall into the higher tax bracket.
The political calculation is dicey. The White House needs the additional revenue to cover some of its ambitious policy agenda, especially a health-care revamp. But some polling data suggest households that earn above $200,000 went heavily for Mr. Obama in November.
Until more details of the tax changes are disclosed, it is unclear whether people making big six-figure sums will be affected at all. They may, for example, be able to avoid tax increases if any number of deductions pull them below the threshold. But that isn't stopping those who earn near the threshold from worrying about it.
Already, many members of Congress are seeking to scale back some of the proposed tax increases, which call for raising the top federal tax rates to 36% from 33% on households earning $250,000 or above.
Wealth and comfort "depends on where you're coming from," said Lois Avitt, a sociologist and founding director of the Institute for Socio-Financial Studies in Charlottesville, Va. To a family earning $50,000, $250,000 is well off, but for the family earning $250,000, rising college and medical costs and dropping home values make the perception debatable.
The reasons for the insecurity are that net worth is declining at the same time that expenses like education and health care, two of the biggest concerns cited by members of that income group, are going up faster than wages and income, says Heidi Shierholz, an economist at the Economic Policy Institute in Washington. "Those are the biggies. They are huge parts of the set of middle-class aspirations, and the prices of those have increased way faster than income." The bursting of the housing bubble makes that more stark.
Mark Zandi, chief economist at Moody's Economy.com, says data show that over the last 10 years, education costs have risen 5.91% annually, and health- care expenses have gone up 4.16% annually, while wages and income have risen only 3.7% over the same time span. That means many families are seeing a greater percentage of their income going toward those two areas.
Education costs, which are far outstripping wages and income, are especially worrisome for this income bracket because upper-income earners are much less likely to receive the kind of financial aid that lower income levels can expect.
The drop in net worth has been staggering. The Federal Reserve, in a recent report, found that U.S. households' net worth dropped by $11 trillion, a decline of nearly 18%, during 2008. That wealth includes everything from home values to mutual funds and life insurance, college and pension funds. The decline equaled the combined output of Germany, Japan and the U.K.
Changes to the tax code don't generally make adjustments for high costs of living in particular areas of the country.
San Jose, Calif., Mayor Chuck Reed calls a family living in Silicon Valley earning $250,000 "upper working class." That is about what two engineers working at a technology firm can expect to make, but "a family earning $250,000 a year can't buy a home in Silicon Valley," he said.
James Duran owns a human-resources company in Silicon Valley and is president of the Hispanic Chamber of Commerce in California. He supported Mr. Obama, but is worried about the tax proposals. He has laid off some employees in recent months and has been wondering how he can fund an extension of those workers' health-care benefits.
Mr. Duran said he and his wife earn about $400,000 annually, but "I'm barely getting by." They have high property and state taxes, as well as college tuition and savings to cover. "I'm an Obama man, but this side of him is a difficult pill for me," he said.
Van Moore, an optometrist in Sevierville, makes just enough in his practice that he worries he might qualify for the tax increase. Mr. Moore said he was contemplating adding two staff workers and another doctor to his practice, but then the economy went soft. In the years after he finished optometry school, his first job brought in less than $20,000 a year. Then he made $50,000 for several years, all the while dealing with his $150,000 student-loan debt, which he still has. Now he is making just above $250,000.
"I'm not in a mobile home with no utilities or running water and holes in the floor," he said. "I'm not poor, but I'm not rich."
For the Parnells, their perception of themselves is based on the math. The value of their house is down $60,000. Ms. Parnell says the couple's gross income last year was about $260,000. Taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut the gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.
"I'm not after sympathy. We are blessed. What I want is a reality check on what rich means," Ms. Parnell says. "I can pay my mortgage and I can buy some clothes. I'm not going without, but I'm not living a life of luxury."
Write to Gary Fields at gary.fields@wsj.com
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
Like most politicians they do not live in reality just some made up version.
This Market is killing me getting stopped out all over the place today. Built up cash last week but not enough or I am getting whipsawed right now we will see. Got to trade. Many stocks finding resistance at their 50 moving averages.
Have a Nice Freak'en Day? Why is the "F" word so vilified?
Daniel Plainview
Wealth-Less Effect: Earning Well, Feeling Otherwise
Sponsored by by Gary Fields
Monday, April 20, 2009
provided by
Proposed Tax Increases on Six-Figure Earners Highlight Mounting Costs of Living -- and the Relativity of Prosperity
Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.
More from WSJ.com:
• How Much Can a Garden Save You?
• Ditch the Jet. Flying Commercial Is Cool
• Tax the Super-Rich More Than the Rich?
Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.
"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."
It is a tricky situation in which some Americans find themselves after a long boom: They are by no means struggling, compared with the 98% of Americans who make far less, but depending on where they live and the lifestyle choices they have made, they don't necessarily feel rich, either. Worse, in their view, they are facing the same tax rates as those making millions. Some of the expenses are self-inflicted -- like private-school costs and conspicuous consumption. Others, though, are unavoidable, like child-care costs, larger health-care deductibles and education expenses, especially college.
Under Mr. Obama's budget proposal, two of the highest tax brackets would see rates rise, and deductions would be reduced for households earning more than $250,000 annually. President Obama said Wednesday, "We've made a clear promise that families that earn less than $250,000 will not see their taxes increase by a single dime."
By any statistical measure, that income level is at the top of the bracket. But for those closest to the line, the money might be less a sign of affluence than it is of the industry of dual-income couples. It is possible, say observers, that veteran civil servants could fall into the higher tax bracket.
The political calculation is dicey. The White House needs the additional revenue to cover some of its ambitious policy agenda, especially a health-care revamp. But some polling data suggest households that earn above $200,000 went heavily for Mr. Obama in November.
Until more details of the tax changes are disclosed, it is unclear whether people making big six-figure sums will be affected at all. They may, for example, be able to avoid tax increases if any number of deductions pull them below the threshold. But that isn't stopping those who earn near the threshold from worrying about it.
Already, many members of Congress are seeking to scale back some of the proposed tax increases, which call for raising the top federal tax rates to 36% from 33% on households earning $250,000 or above.
Wealth and comfort "depends on where you're coming from," said Lois Avitt, a sociologist and founding director of the Institute for Socio-Financial Studies in Charlottesville, Va. To a family earning $50,000, $250,000 is well off, but for the family earning $250,000, rising college and medical costs and dropping home values make the perception debatable.
The reasons for the insecurity are that net worth is declining at the same time that expenses like education and health care, two of the biggest concerns cited by members of that income group, are going up faster than wages and income, says Heidi Shierholz, an economist at the Economic Policy Institute in Washington. "Those are the biggies. They are huge parts of the set of middle-class aspirations, and the prices of those have increased way faster than income." The bursting of the housing bubble makes that more stark.
Mark Zandi, chief economist at Moody's Economy.com, says data show that over the last 10 years, education costs have risen 5.91% annually, and health- care expenses have gone up 4.16% annually, while wages and income have risen only 3.7% over the same time span. That means many families are seeing a greater percentage of their income going toward those two areas.
Education costs, which are far outstripping wages and income, are especially worrisome for this income bracket because upper-income earners are much less likely to receive the kind of financial aid that lower income levels can expect.
The drop in net worth has been staggering. The Federal Reserve, in a recent report, found that U.S. households' net worth dropped by $11 trillion, a decline of nearly 18%, during 2008. That wealth includes everything from home values to mutual funds and life insurance, college and pension funds. The decline equaled the combined output of Germany, Japan and the U.K.
Changes to the tax code don't generally make adjustments for high costs of living in particular areas of the country.
San Jose, Calif., Mayor Chuck Reed calls a family living in Silicon Valley earning $250,000 "upper working class." That is about what two engineers working at a technology firm can expect to make, but "a family earning $250,000 a year can't buy a home in Silicon Valley," he said.
James Duran owns a human-resources company in Silicon Valley and is president of the Hispanic Chamber of Commerce in California. He supported Mr. Obama, but is worried about the tax proposals. He has laid off some employees in recent months and has been wondering how he can fund an extension of those workers' health-care benefits.
Mr. Duran said he and his wife earn about $400,000 annually, but "I'm barely getting by." They have high property and state taxes, as well as college tuition and savings to cover. "I'm an Obama man, but this side of him is a difficult pill for me," he said.
Van Moore, an optometrist in Sevierville, makes just enough in his practice that he worries he might qualify for the tax increase. Mr. Moore said he was contemplating adding two staff workers and another doctor to his practice, but then the economy went soft. In the years after he finished optometry school, his first job brought in less than $20,000 a year. Then he made $50,000 for several years, all the while dealing with his $150,000 student-loan debt, which he still has. Now he is making just above $250,000.
"I'm not in a mobile home with no utilities or running water and holes in the floor," he said. "I'm not poor, but I'm not rich."
For the Parnells, their perception of themselves is based on the math. The value of their house is down $60,000. Ms. Parnell says the couple's gross income last year was about $260,000. Taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut the gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.
"I'm not after sympathy. We are blessed. What I want is a reality check on what rich means," Ms. Parnell says. "I can pay my mortgage and I can buy some clothes. I'm not going without, but I'm not living a life of luxury."
Write to Gary Fields at gary.fields@wsj.com
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
Like most politicians they do not live in reality just some made up version.
This Market is killing me getting stopped out all over the place today. Built up cash last week but not enough or I am getting whipsawed right now we will see. Got to trade. Many stocks finding resistance at their 50 moving averages.
Have a Nice Freak'en Day? Why is the "F" word so vilified?
Daniel Plainview
Friday, April 17, 2009
Did They Do Enough To Stir The Pot?
The Tea Parties seem to be causing a stir with the media, as the article below explicitly says this was a right wing event, I am not so sure it was a right wing event, true the right wing wants to be part of it but in reality they are part of the problem, this was directed at big, wasteful Government, wasteful spending, bridges to nowhere. Many people are getting tired of watching. They normally watch because they have jobs and families they choose to support instead of missing a day of work to strike or protest. They appreciate what they have and know it is not an entitlement so they hold in the frustration and battle through the daily grind. This current crises and the ensuing actions of our government is motivating the commonly silent workers in our society to take a stand, it shows me that the level of frustration currently is the highest it has ever been in my life time. People want liberty, the right to choose how to spend their own money. We do not want to be a collective or a commune, where everyone is special, no one is motivated to excel, be creative or have the opportunity to set ones self apart from the crowd. We want to be the United States of America the way the founding fathers intended it to be. This is not Nineteen eighty-four, I hope.
Remember Big brother is watching.
Full story here
April 16, 2009
Schakowsky: Tea parties 'despicable'
@ 1:23 pm by Eric Zimmermann
Rep. Jan Schakowsky (D-Ill.) blasted "tea party" protests yesterday, labeling the activities "despicable" and shameful."
"The �tea parties� being held today by groups of right-wing activists, and fueled by FOX News Channel, are an effort to mislead the public about the Obama economic plan that cuts taxes for 95 percent of Americans and creates 3.5 million jobs," Schakowsky said in a statement.
"It�s despicable that right-wing Republicans would attempt to cheapen a significant, honorable moment of American history with a shameful political stunt," she added. "Not a single American household or business will be taxed at a higher rate this year. Made to look like a grassroots uprising, this is an Obama bashing party promoted by corporate interests, as well as Republican lobbyists and politicians.�
This is the strongest language to date opposing the protesters, which, according to some estimates, topped 250,000 across the country.
Also on The Hill: GOP contemplates embracing tea-partiers
Have a great weekend
Daniel Plainview
Remember Big brother is watching.
Full story here
April 16, 2009
Schakowsky: Tea parties 'despicable'
@ 1:23 pm by Eric Zimmermann
Rep. Jan Schakowsky (D-Ill.) blasted "tea party" protests yesterday, labeling the activities "despicable" and shameful."
"The �tea parties� being held today by groups of right-wing activists, and fueled by FOX News Channel, are an effort to mislead the public about the Obama economic plan that cuts taxes for 95 percent of Americans and creates 3.5 million jobs," Schakowsky said in a statement.
"It�s despicable that right-wing Republicans would attempt to cheapen a significant, honorable moment of American history with a shameful political stunt," she added. "Not a single American household or business will be taxed at a higher rate this year. Made to look like a grassroots uprising, this is an Obama bashing party promoted by corporate interests, as well as Republican lobbyists and politicians.�
This is the strongest language to date opposing the protesters, which, according to some estimates, topped 250,000 across the country.
Also on The Hill: GOP contemplates embracing tea-partiers
Have a great weekend
Daniel Plainview
Wednesday, April 15, 2009
A New Parties Birth?
Tax Day Becomes Protest Day
By GLENN HARLAN REYNOLDS
Today American taxpayers in more than 300 locations in all 50 states will hold rallies -- dubbed "tea parties" -- to protest higher taxes and out-of-control government spending. There is no political party behind these rallies, no grand right-wing conspiracy, not even a 501(c) group like MoveOn.org.
Reuters
A rally and march in protest of higher taxes in Santa Barbara, Calif., April 4.
So who's behind the Tax Day tea parties? Ordinary folks who are using the power of the Internet to organize. For a number of years, techno-geeks have been organizing "flash crowds" -- groups of people, coordinated by text or cellphone, who converge on a particular location and then do something silly, like the pillow fights that popped up in 50 cities earlier this month. This is part of a general phenomenon dubbed "Smart Mobs" by Howard Rheingold, author of a book by the same title, in which modern communications and social-networking technologies allow quick coordination among large numbers of people who don't know each other.
In the old days, organizing large groups of people required, well, an organization: a political party, a labor union, a church or some other sort of structure. Now people can coordinate themselves.
We saw a bit of this in the 2004 and 2008 presidential campaigns, with things like Howard Dean's use of Meetup, and Barack Obama's use of Facebook. But this was still social-networking in support of an existing organization or campaign. The tea-party protest movement is organizing itself, on its own behalf. Some existing organizations, like Newt Gingrich's American Solutions and FreedomWorks, have gotten involved. But they're involved as followers and facilitators, not leaders. The leaders are appearing on their own, and reaching out to others through blogs, Facebook, chat boards and alternative media.
Read the rest of the Story at the WSJ here.
Daniel Planview
By GLENN HARLAN REYNOLDS
Today American taxpayers in more than 300 locations in all 50 states will hold rallies -- dubbed "tea parties" -- to protest higher taxes and out-of-control government spending. There is no political party behind these rallies, no grand right-wing conspiracy, not even a 501(c) group like MoveOn.org.
Reuters
A rally and march in protest of higher taxes in Santa Barbara, Calif., April 4.
So who's behind the Tax Day tea parties? Ordinary folks who are using the power of the Internet to organize. For a number of years, techno-geeks have been organizing "flash crowds" -- groups of people, coordinated by text or cellphone, who converge on a particular location and then do something silly, like the pillow fights that popped up in 50 cities earlier this month. This is part of a general phenomenon dubbed "Smart Mobs" by Howard Rheingold, author of a book by the same title, in which modern communications and social-networking technologies allow quick coordination among large numbers of people who don't know each other.
In the old days, organizing large groups of people required, well, an organization: a political party, a labor union, a church or some other sort of structure. Now people can coordinate themselves.
We saw a bit of this in the 2004 and 2008 presidential campaigns, with things like Howard Dean's use of Meetup, and Barack Obama's use of Facebook. But this was still social-networking in support of an existing organization or campaign. The tea-party protest movement is organizing itself, on its own behalf. Some existing organizations, like Newt Gingrich's American Solutions and FreedomWorks, have gotten involved. But they're involved as followers and facilitators, not leaders. The leaders are appearing on their own, and reaching out to others through blogs, Facebook, chat boards and alternative media.
Read the rest of the Story at the WSJ here.
Daniel Planview
Tuesday, April 14, 2009
The Trillion Dollar Question
Inflation or Deflation that is the question I ask of the?
Any Thoughts, Feedback ?
Any Thoughts, Feedback ?
Happy tax day eve.
Are there any statesmen or leaders to be found in the United States or are we left with only lying, two faced, back stabbing politicians? I despise all politicians. Sorry about my despair but scope of the wasteful and incessant spending of both parties in an attempt to advance an agenda of ever expanding government has brought me down today. The debt burden we are creating today will handicap future generations of Americans. Something has to be allowed to fail but it should not be the dream of capitalism and an independent democracy. We’re not the country of France, or the United Kingdom or Canada, Hugo Chavez should not be right, but our actions lead us down a dangerous path.
"When the people fear their government, there is tyranny; when the government fears the people, there is liberty."
Thomas Jefferson
Video's that started the rant, along with being one of the 49% of american who are paying taxes put a burr under my saddle.
What short memories do they have Waters
All of congress is repsonsible some one step up
I wish I lived in Texas.
Daniel Plainiview
"When the people fear their government, there is tyranny; when the government fears the people, there is liberty."
Thomas Jefferson
Video's that started the rant, along with being one of the 49% of american who are paying taxes put a burr under my saddle.
What short memories do they have Waters
All of congress is repsonsible some one step up
I wish I lived in Texas.
Daniel Plainiview
Wednesday, April 8, 2009
Recap of the last 15 years
This was taken from the Alleghany Corporation 2008 annual report, from the "To Our Stock Holders Section"
http://www.alleghany.com/Documents/2008annualreport.pdf
Thoughts on the big picture
The imbalances that are evident today in the global economy trace their origins to August of 1994,when China embarked upon a course of a managed, nominal currency peg of the renminbi (RMB)against the U.S. dollar. Few remember today that as recently as 1981, the RMB/USD exchange rate was as strong as 1.53 yuan per dollar; by 1994 it had weakened to as low as 8.76 yuan per dollar, and was pegged at 8.28 until 2005. Over the following decade and a half, this currency policy contributed to stagnant U.S. household incomes (real median U.S. household income is lower today than it was in 1998), as U.S. labor could not compete with a massive, artificially priced Chinese labor pool due to the currency devaluation. The mechanism with which China (and other countries with pegged currencies) kept its currency artificially depressed was to recycle dollars into U.S. treasury securities and agency securities, thereby keeping U.S. interest rates artificially low, exporting deflation, and importing inflation. The prime beneficiary of this policy in the United States and other OECD (Organization for Economic Cooperation and Development) countries was the financial services industry, which took advantage of excessively easy money and low interest rates to fund credit expansion to middle class households, who sought to improve their standard of living despite stagnant
incomes by borrowing to fund consumption.
With perfect hindsight, it is now clear that 2007 probably marked the end of a 25-year credit binge in the United States. By the third quarter of 2008, total debt in the United States—government, corporate, financial, and household—exceeded 350% of GDP, a higher level than was the case in 1929. Over the past ten years, each incremental dollar of debt in the U.S. economy produced less and less growth in nominal GDP, with the marginal productivity of debt headed toward zero by 2013. The global economy, increasingly unbalanced and held together by a highly unstable and complex financial system, began to teeter in 2007 and collapsed in 2008. Inflationary pressures, which were significant in the first half of last year, turned to a deflationary collapse in the second half of the year.
The epicenter of the credit collapse was the investment banking industry and other capital providers,including private equity firms, hedge funds, and a variety of securitization vehicles. This system—referred to by some as “the shadow banking system”1—became the dominant provider of credit to households to fund consumption through the creation of structured securities that linked global savers to, primarily, U.S. consumers. Household debt began to expand at a very rapid rate, doubling from $7 trillion in 2000 to $14 trillion by the third quarter of 2008. A casual review of the Federal Reserve’s Flow of Funds report makes clear that at least $3.6 trillion of this debt may never be repaid as growth in personal income was far slower than growth in household debt. The majority of these assets appear
to be held by the largest financial institutions in the world, placing their solvency at risk.
Like a finely-engineered Swiss watch, the global economy depends on the proper functioning of all of its pieces for the mechanism to work. As the weakest borrowers in the system began to collapse, the global economy came under increasing stress in 2008 and, following the collapse of several major
financial institutions, the system virtually shut down in late 2008.
Most economists view the world through a profit-maximization model. The assumption is that given stimulus—either tax cuts or cheaper money—consumers will consume, and businesses will invest. However, another model—the survival model—suggests that liquidity and debt reduction become the overriding factors in economic motivation following a long period of easy credit, inflated asset values, and ultimately an asset collapse.2 Moreover, it seems to us that we are likely in for a long economic
winter, as households attempt to reduce leverage and businesses fight for survival in deteriorating economic conditions. In such an environment, an abundance of caution is in order.
Governments and policy makers continue to attempt to address the problem of inadequate aggregate demand in the OECD economies by trying to increase demand for credit. Unfortunately, a reasonable case can be made that there is no demand for credit because borrowers are either insolvent or
financially impaired. The dramatic expansion of the money supply in response to collapsing velocity has not yet produced inflationary pressure, but this eventuality cannot be dismissed. A reasonable scenario, in our opinion, would be for a prolonged (3-5 years) period of negligible economic growth, continued credit problems, and rising inflationary pressure.
Any thoughts ?
http://www.alleghany.com/Documents/2008annualreport.pdf
Thoughts on the big picture
The imbalances that are evident today in the global economy trace their origins to August of 1994,when China embarked upon a course of a managed, nominal currency peg of the renminbi (RMB)against the U.S. dollar. Few remember today that as recently as 1981, the RMB/USD exchange rate was as strong as 1.53 yuan per dollar; by 1994 it had weakened to as low as 8.76 yuan per dollar, and was pegged at 8.28 until 2005. Over the following decade and a half, this currency policy contributed to stagnant U.S. household incomes (real median U.S. household income is lower today than it was in 1998), as U.S. labor could not compete with a massive, artificially priced Chinese labor pool due to the currency devaluation. The mechanism with which China (and other countries with pegged currencies) kept its currency artificially depressed was to recycle dollars into U.S. treasury securities and agency securities, thereby keeping U.S. interest rates artificially low, exporting deflation, and importing inflation. The prime beneficiary of this policy in the United States and other OECD (Organization for Economic Cooperation and Development) countries was the financial services industry, which took advantage of excessively easy money and low interest rates to fund credit expansion to middle class households, who sought to improve their standard of living despite stagnant
incomes by borrowing to fund consumption.
With perfect hindsight, it is now clear that 2007 probably marked the end of a 25-year credit binge in the United States. By the third quarter of 2008, total debt in the United States—government, corporate, financial, and household—exceeded 350% of GDP, a higher level than was the case in 1929. Over the past ten years, each incremental dollar of debt in the U.S. economy produced less and less growth in nominal GDP, with the marginal productivity of debt headed toward zero by 2013. The global economy, increasingly unbalanced and held together by a highly unstable and complex financial system, began to teeter in 2007 and collapsed in 2008. Inflationary pressures, which were significant in the first half of last year, turned to a deflationary collapse in the second half of the year.
The epicenter of the credit collapse was the investment banking industry and other capital providers,including private equity firms, hedge funds, and a variety of securitization vehicles. This system—referred to by some as “the shadow banking system”1—became the dominant provider of credit to households to fund consumption through the creation of structured securities that linked global savers to, primarily, U.S. consumers. Household debt began to expand at a very rapid rate, doubling from $7 trillion in 2000 to $14 trillion by the third quarter of 2008. A casual review of the Federal Reserve’s Flow of Funds report makes clear that at least $3.6 trillion of this debt may never be repaid as growth in personal income was far slower than growth in household debt. The majority of these assets appear
to be held by the largest financial institutions in the world, placing their solvency at risk.
Like a finely-engineered Swiss watch, the global economy depends on the proper functioning of all of its pieces for the mechanism to work. As the weakest borrowers in the system began to collapse, the global economy came under increasing stress in 2008 and, following the collapse of several major
financial institutions, the system virtually shut down in late 2008.
Most economists view the world through a profit-maximization model. The assumption is that given stimulus—either tax cuts or cheaper money—consumers will consume, and businesses will invest. However, another model—the survival model—suggests that liquidity and debt reduction become the overriding factors in economic motivation following a long period of easy credit, inflated asset values, and ultimately an asset collapse.2 Moreover, it seems to us that we are likely in for a long economic
winter, as households attempt to reduce leverage and businesses fight for survival in deteriorating economic conditions. In such an environment, an abundance of caution is in order.
Governments and policy makers continue to attempt to address the problem of inadequate aggregate demand in the OECD economies by trying to increase demand for credit. Unfortunately, a reasonable case can be made that there is no demand for credit because borrowers are either insolvent or
financially impaired. The dramatic expansion of the money supply in response to collapsing velocity has not yet produced inflationary pressure, but this eventuality cannot be dismissed. A reasonable scenario, in our opinion, would be for a prolonged (3-5 years) period of negligible economic growth, continued credit problems, and rising inflationary pressure.
Any thoughts ?
Monday, April 6, 2009
Macro Man's New Financial World
Macro man has some interesting thoughts on a NEW Financial world.
Read the complete post at: http://macro-man.blogspot.com/2009/04/make-new-world.html
Today, however, he wishes to offer a few small suggestions as to how he would make a new financial world. The list is by no means meant to be comprehensive. nor indeed is every item on the list replete with detail. Still, you gotta start somewhere:
* Change the regulation and/or incentive structure of the ratings agencies. One of the fundamental flaws in the current (or is that prior) economic system is that the ratings agencies were paid by the sellers, rather than the buyers, of bonds and structured credit. They were therefore incentivized to help those sellers game the models to win the most favourable ratings. If, however, they were compensated by the buyers of bonds and structured credit, they should be incentivized to, you know, get things right.
* Migrate the CDS market to exchanges with position limits and heavy margining. This has obviously been suggested elsewhere, but bears repeating. In its worst form, the CDS market has a) added untold leverage into the system, and b) represented little more than Mr. Smith buying fire insurance on the houses of Mr. Jones and Mr. Wesson. If a fire (whether natural or via arson) consumes the entire street, the neighbourhood as a whole loses out, but Mr. Smith is quids in. What sort of incentive structure does this give Smith, and what is the impact on society at large?
Read the complete post at: http://macro-man.blogspot.com/2009/04/make-new-world.html
Today, however, he wishes to offer a few small suggestions as to how he would make a new financial world. The list is by no means meant to be comprehensive. nor indeed is every item on the list replete with detail. Still, you gotta start somewhere:
* Change the regulation and/or incentive structure of the ratings agencies. One of the fundamental flaws in the current (or is that prior) economic system is that the ratings agencies were paid by the sellers, rather than the buyers, of bonds and structured credit. They were therefore incentivized to help those sellers game the models to win the most favourable ratings. If, however, they were compensated by the buyers of bonds and structured credit, they should be incentivized to, you know, get things right.
* Migrate the CDS market to exchanges with position limits and heavy margining. This has obviously been suggested elsewhere, but bears repeating. In its worst form, the CDS market has a) added untold leverage into the system, and b) represented little more than Mr. Smith buying fire insurance on the houses of Mr. Jones and Mr. Wesson. If a fire (whether natural or via arson) consumes the entire street, the neighbourhood as a whole loses out, but Mr. Smith is quids in. What sort of incentive structure does this give Smith, and what is the impact on society at large?
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